TRADING CASE B03A
Forward pricing with uncertain rates
LEARNING OBJECTIVE
Price and trade bond forwards when future spot rates are uncertain and traders have different information.
KEY CONCEPTS
Forward pricing | Expected rates | Private information | Market prices
HOW THE CASE WORKS
You trade the same bonds and forwards as in B03, but the Year 2 and Year 3 rates are uncertain. Each trader receives a true private message that rules out one possible rate.
BOND PAYMENTS
| Instrument | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| 10% coupon bond | 10 | 10 | 110 |
| 1-year zero | 100 | 0 | 0 |
| 2-year zero | 0 | 100 | 0 |
| 3-year zero | 0 | 0 | 100 |
INTEREST RATES
Year 1 is 4%. Year 2 is equally likely to be 8%, 10%, or 12%; Year 3 is equally likely to be 14%, 16%, or 18%. The realized rate applies to both cash and borrowing.
TRADING RULES
- Forward 1 delivers the Year-2 zero after Year 1; Forward 2 delivers the Year-3 zero after Year 2.
- No cash changes hands when you enter a forward.
- Messages say a future rate is not low, middle, or high, and are always true.
- After trading starts, click Cp Bnd to see your message.
AFTER TRADING CLOSES
Read your private message before placing orders.
The actual rate is applied to your closing cash.
Bond payments and forward deliveries are completed; after Year 3, all positions become cash.
PERFORMANCE: Trading bonus (grade cash) per trial = 0.0001 x closing market cash. Positive wealth adds grade cash; negative wealth subtracts it. Results accumulate across independent trials.